Enterprises have devoted – and continue to devote – resources to green supply chain initiatives. Officially, companies often champion their environmental credentials in glossy reports, speeches and media interviews.
Behind the scenes, however, many will admit that they do only the minimum for three basic reasons.
Risk mitigation. Regardless of the degree to which company executives believe in the threat of climate change or the ravages of environmental degradation, many of their customers do, and they need to respond to these beliefs (even though the same customers are not likely to be willing to pay more for sustainable products). If they don’t, they risk incurring the wrath of NGOs and the media, leading to reputational damage.
This class of supply chain risk management can be termed eco-risk mitigation; initiatives that aim to reduce the likelihood and magnitude of business disruptions caused by environmental issue. In principle, they can be evaluated in the same way as insurance or other business risk-reduction efforts. In addition to the threat of reputational damage, this type of risk also encompasses investor actions that trigger management changes and disruptive government regulations.
Unfortunately, unlike the case of insurable events such as natural disasters and accidents, risk managers have scant reliable actuarial data for quantifying the likelihood of NGO strikes, consumer preference changes, or adverse regulatory changes. Consequently, the few available insurance policies have limited scope and high costs. Thus, companies are left to manage these risks themselves using “just-in-case” or scenario-based justifications for risk mitigation.
In the early 1990s, chemical company BASF learned of the potential toxicity dangers of using brome-based flame retardants in its polyamide plastic line. If incinerated, the material could produce highly carcinogenic dioxins in the smoke. Less than six months after receiving an initial heads-up from management, the product was completely pulled from the market. Although it was “the right thing to do” the company’s sales suffered. Customers complained, and competitors that still sold polyamide with the toxin gained market share. It took two years for BASF to find a safe alternative material. On the plus side, the company was not subject to reputational costs or attacks from environmentalists and the media during the period when it did not have product on the market.
Cost cutting. Investing in green initiatives can reduce supply chain costs. An example is how reducing the number of empty miles can shrink a company’s carbon footprint and capture cost savings in freight transportation. Retailer Macy’s eliminated 21% of empty miles and saved about $1.75 million annually by joining a program that posts retailers’ empty miles and finds shippers that can take advantage of the unused truck capacity.
Switching to local sourcing is a way to take miles and cost out of a supply chain and reduce the carbon footprint. This is especially true for food, where the concept of “food miles” has been popularized by NGOs and environmental writers. Whole Foods, Walmart and other retailers have programs to “buy local” typically from suppliers in the same state or a modest distance away. However, local sourcing does not always reduce the total life cycle carbon footprint of a product. Factors such as the carbon intensity of the local power grid or the need for energy intensive production techniques can more than offset any environmental impact savings from reduced transportation.
Hedging. The third incentive for modest investments in green is that companies need to gain relevant expertise just in case consumer taste and demand change. For instance, Millennial consumers tend to be more environmentally conscious than the baby boomer generation of consumers, and these convictions may shape future markets.
In 2008 cleaning products maker The Clorox Company launched a line of environmentally friendly cleaners called Green Works. It was the first new product line in two decades for the 95-year old company. Green Works was a family of 17 green cleaning products designed with natural active ingredients that competed with the company’s main line of cleaning products. Buoyed by a $25 million-a-year advertising push in 2008 and 2009, the Green Works product line sales brought in $58 million a year in 2009. However, the price premium of the products during a recession and doubts over its efficacy caused sales to fall to just $32 million in 2012. Clorox responded by lowering the price of the product and launching a rebranding campaign in 2013 with the aim of attracting mainstream buyers. Ultimately, Green Works proved to be a money-losing proposition, yet the company’s CEO Don Knauss insisted that “it was all about growth.” The venture enabled the $5.6 billion company to make a relatively small investment in building its knowledge about green products.
Companies also tout cost cutting or other corporate projects that happen to yield environmental benefits as mainly green projects. But the three motives described above underlie many of the claims companies make about their green achievements in supply chains.
This post is based on the article Clarifying the Business Case for Green Supply Chain Management by Yossi Sheffi, Elisha Gray II Professor of Engineering Systems at MIT, and Director of the MIT Center for Transportation & Logistics, published in the June 2018 issue of Inbound Logistics magazine.
Yossi Sheffi’s new book is Balancing Green: When to Embrace Sustainability in a Business (and when not to). MIT Press, 2018.
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